China's Economy Facts and Effect on the U.S. Economy

How Much Does China Really Affect the U.S. Economy?

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A teller counts Chinese Yuan banknotes at a bank in Shanghai, China, on February 1, 2008. The Chinese Yuan is known locally as the RMB, or renminbi, which means 'the money of the people'. Photo by Lucas Schifres/Pictobank/Getty Images

China's economy produced $21.27 trillion in 2016 (based on purchasing power parity). It's the world's largest economy. The European Union is second, at $19.1 trillion. The United States fell to third place, producing $18.5 trillion.

China has 1.37 billion people, more than any other country in the world. China is still a relatively poor country in terms of its standard of living. Its economy only produces $15,400 per person, compared to the U.S. GDP per capita of $57,300.

The low standard of living allows companies in China to pay their workers less than American workers. That makes products cheaper, which lures overseas manufacturers to outsource jobs to China. 

Components of China's Economy 

China built its economic growth on low-cost exports of machinery and equipment. Massive government spending went into state-owned companies to fuel those exports. These companies dominate their industries. They include the big three energy companies: PetroChina, Sinopec and China National Offshore Oil Corporation. These state-owned companies are less profitable than private firms. They return only 4.9 percent on assets compared to 13.2 percent for private companies.

China developed cities around these factories to attract workers. As a result, one-fourth of China's economy is in real estate. The government also funded construction of railways and other infrastructure to support growth.

As a result, it imported massive amounts of commodities, like aluminum and copper. 

By 2013, the 10 percent annual growth threatened to become a bubble. That's when China looked toward economic reform.

China's Exports

China was the world's largest exporter from 2013 to 2015. It exported $2 trillion of its production in 2016.

The EU took the No. 1 spot, exporting $2.26 trillion. The United States came in third at just $1.47 trillion. 

China shipped 18 percent of its exports to the United States in 2015. That contributed to a $365 billion trade deficit. China's trade with Hong Kong was almost as much (14.6 percent). Its trade with Japan (6 percent) and South Korea (4.5 percent) was much less.

China encouraged trade with African nations, investing in their infrastructure in return for oil. It increased trade agreements with Southeast Asian nations and many Latin American countries. That's why President Obama launched the Trans-Pacific Partnership trade agreement. It doesn't include China. That’s because one of its goals was to balance China's growing economic power in the region. That agreement was thrown into jeopardy once President Trump withdrew from it January 2017.

China does a lot of manufacturing for foreign businesses, including U.S. companies. They ship raw materials to China. Factory workers build the final products and ship them back to the United States. In this way, a lot of China's so-called "exports" are technically American products.

China primarily exports electrical equipment and other types of machinery.

This includes computers and data processing equipment as well as optical and medical equipment. It also exports apparel, fabric and textiles. It's the world's largest exporter of steel. 

China Imports

China is the world's third largest importer. In 2016, it imported $1.4 trillion. The United States imported $2.2 trillion. China imports raw commodities from Latin America and Africa, such as oil and other fuels, metal ores, plastics and organic chemicals. It's the world's largest importer of aluminum and copper. 

China's Share of World Commodity Consumption in 2014/2015

Commodity Share of World Consumption
Aluminum 54%
Nickel 50%
Copper 48%
Zinc, Tin 46% of each
Steel 45%
Lead 40%
Cotton 31%
Rice 30%
Gold 23%
Corn 22%
Wheat 17%
Oil 12%

China’s commodity consumption has fueled a world-wide boom in mining and agriculture.

Unfortunately, suppliers over-produced, creating too much supply. As a result, prices cratered in 2015. As China's growth slows, prices for commodities used in manufacturing, such as metals, will drop. 

Why China's Growth Is Slowing

China's economic growth rate slowed to 6.6 percent in 2016, the lowest since 2009. It grew 6.9 percent in 2015, 7.3 percent in 2014, 7.7 percent in 2013, 7.8 percent in 2012 and 9.3 percent in 2011. Before that, China enjoyed 30 years of double-digit growth. Unfortunately, that was fed by government stimulus spending, business investment in capital goods, low-interest rates and state protection of strategic industries like banking. This success led to 5.5 percent inflation in 2011, a real estate asset bubble, growth in public debt and severe pollution. 

The government's emphasis on job creation and exports left little for social welfare programs. That forced the Chinese population to save for their retirement, strangling domestic demand. Most of the growth occurred in the cities along China's east coast. These urban areas attracted 250 million migrant workers.

Chinese leaders must continue to create jobs for all these workers or face unrest. They remember Mao's Revolution all too well. At the same time, they must provide more social services. That would allow workers to save less and spend more. Only an increase in domestic demand will enable China to become less reliant on exports.

In addition, leaders must crack down on local corruption. They must find ways to improve the environmental impact of industrialization. Already leaders have embarked on an ambitious nuclear and alternative energy program to reduce reliance on dirty coal and imported oil. All of these measures are part of China's economic reform.

How China Affects the U.S. Economy

China is the largest foreign holder of U.S. Treasury bills, bonds, and notes. As of August 2017, China owned $1.2 trillion in Treasurys. That's 30 percent of the public debt held by foreign countries. The U.S. debt to China is still lower than the record-high of $1.3 trillion held in November 2013. 

China buys U.S. debt to support the value of the dollar. This is because China pegs its currency (the yuan) to the U.S. dollar. It devalues the currency when needed to keep its export prices competitive. 

China's role as America's largest banker gives it leverage. For example, China threatens to sell part of its holdings whenever the United States pressures it to raise the yuan's value. Since 2005, China raised the yuan's value by 33 percent against the dollar. Between 2014 and 2015, the dollar's strength increased by 25 percent. China allowed the value of the yuan to decline. This was so its exports could remain competitive with Asian countries that hadn't tied their currency to the dollar. 

How China Avoided the Great Recession

During the financial crisis of 2008, China pledged 4 trillion yuan, about $580 billion, to stimulate its economy to avoid the recession. The funds represented 20 percent of China's annual economic output. It went towards low-rent housing, infrastructure in rural areas, and construction of roads, railways, and airports. China also increased tax deductions for machinery, saving businesses 120 billion yuan. China raised both subsidies and grain prices for farmers, as well as allowances for low-income urban dwellers.

It eliminated loan quotas for banks to increase small business lending. But now China's companies are struggling to repay that debt. Combined private/public debt is two and a half times greater than GDP (Source: "Taking a Tumble," The Economist, August 29, 2015.)

China also took a leadership role by dropping interest rates three times in two months.  (Source: "China Unveils 4 Trillion Yuan Spending as World Faces Recession," Bloomberg, November 10, 2008) 

The United States Accuses China of Unfair Trade Practices

In the 2016 presidential campaign, Republican candidate Donald Trump accused China of unfair trade practices. He threatened to slap a 30 percent tariff on all Chinese imports. China's unfair trade practices were also a hot topic during the 2012 presidential debate. During that debate, President Obama recounted how the U.S. Department of Commerce successfully brought many disputes to the World Trade Organization over unfair practices involving tires, steel and other materials. The WTO has a specific process to resolve trade disputes.

These accusations are nothing new. In 2007, the Commerce Department threatened to apply penalty tariffs to Chinese products. For example, it accused China of dumping its paper exports into the United States. The Commerce Department claimed that China unfairly provided subsidies of 10-20 percent to its manufacturers of glossy paper used in books and magazines. Trade volume had grown 177 percent in one year. The U.S.-based New Page Corporation brought the anti-dumping case to the Commerce Department. It said it could not compete against subsidized prices.

China Is the Reason Hank Paulson Became Treasury Secretary

Former U.S. Treasury Secretary Henry Paulson was hired in 2006 to lower the trade deficit with China. He initiated the “Strategic Economic Dialogue” to open China's market, especially its banking industry. He had several successes. He persuaded Chinese leaders to raise the yuan's value when compared to the dollar 20 percent between 2005 and 2008. They also eliminated a 17 percent tax rebate for exporters. They increased the reserve requirement for central banks to 12 percent. They also invested $3 billion in the U.S. Blackstone Group.